SA inflation back below 6%

Inflation momentum as measured by the quarter-on-quarter annualised rate (ar) moved back below 6% in June to 5.9% from this year’s peak of 8.1% in May.

Statistics SA (Stats SA) used to publish the q/q ar in the old consumer price index‚ but did away with it when it published the new series‚ which has a base of 2008.

The q/q ar is very useful for analysis purposes as monetary policy works with a lag of some 18 months on inflation. That is why for instance economists focus on the q/q ar if they look at gross domestic product (GDP) growth momentum‚ rather than the year ago rate.

In May 2011‚ when many other central banks were raising rates in response to rising food and energy inflation‚ the q/q ar rate peaked at 9.1%.

The South African Reserve Bank (SARB) warned in its semi-annual Monetary Policy Review in May 2011 that cost-push inflation cannot be ignored and the Monetary Policy Committee (MPC) would remain “vigilant” with respect to a move from first-round food and energy price increases to a more generalised or second-round inflation.

Now many central banks are cutting their policy rates as international oil prices have tumbled after Abu Dhabi opened a 1.5 million barrel per day oil pipeline that bypassed the Straits of Hormuz‚ which Iran has repeatedly threatened to close.

The year on year (y/y) rate was at 6.0% or above between October 2011 and and April 2012. At the November 2011 MPC meeting‚ the SARB said “inflation is expected to breach the upper end of the target range in the final quarter of 2011 and to peak in the first quarter of 2012 at around 6.3% before declining gradually and returning to within the target range in the final quarter of 2012.”

Overall consumer inflation eased to 5.5% y/y in June from 5.7% y/y in May and this year’s peak of 6.3% y/y in January. The quarterly average y/y rate in the second quarter was 5.7%.

Nomura International economist Peter Attard Montalto said housing inflation had surprised to the downside.

“There were a number of important housing surveys which actually surprised us to the downside. Owners equivalent rent ticked up only to 4.4% where we had expected 4.6% and actual rentals fell back from 4.5% to 4.2%. This was offset by other core items actually moving slightly higher and meant that overall core inflation moved higher to 4.6% from 4.4% previously. The overall story of inflation was rapidly retreating non-core pressures with core still holding up but showing no signs of demand-led and only minimal second-round-cost-push-effect and so no threat to price stability. The softness in the housing market is not totally unexpected (in terms of trend)‚ but we were surprised that the weakness is being felt in both items. That said there is still some uncertainty over the two separate indices used for them. The food move continues to be driven more by non-base foods falling particularly fast (meat‚ fish‚ processed) whilst base food items (grains‚ milk etc) falling‚ but more slowly‚” he said.

Vunani Securities economist Johan Rossouw said the domestic inflation trend was firmly downwards in spite of some resurgence in oil prices and maize prices.

“Food inflation moderated significantly from a peak above 11% by the end of 2011 and now appears to be firmly in the target band. A high base of calculation will in our view‚ render sufficient technical support to sustain the trend of moderation in food inflation over the remainder of 2012 in spite of increased pressures in case of some food products as discussed above. Obviously‚ a reversal due to some unexpected shock(s) cannot be ruled out‚ but the odds still appear to be stacked in favour of sustained inflation moderation in the months to come amidst fairly benign growth in consumer demand. The Monetary Policy Committee (MPC) will no doubt take note of the potential risks posed to SA by international factors like the European debt crisis‚ but also be very cognisant of the domestic imperative to maximise sustained economic growth and job creation. Even though we still expect inflation to moderate to about the middle of the target band by the end of the year‚ recent deterioration in the current account balance in particular‚ does call for caution‚ though. Consequently‚ even though a decision to cut the domestic repurchase rate would not come as a major surprise to us‚ we are still expecting an unchanged rate decision as the more likely outcome. Should there be no near-term rate cuts‚ such an outcome could eventually result in domestic benchmark interest rates remaining at prevailing levels for a further protracted period of time‚ possibly into 2014‚” he said.

Stanlib economist Kevin Lings said the lower inflation reading was partly due to a further easing in food inflation (down 0.2% month on month (m/m))‚ a reduction in petrol inflation (-4.6% m/m) and a lower than expected rise in rental inflation.

“Food prices have clearly lost momentum in recent months. In fact‚ the 3-month moving average of the monthly rate of change is now negative. On an annual basis‚ food inflation moderated to 6.0%‚ which is well below the recent peak of 11.6% y/y recorded in November 2011. We still expect that the annual rate of change in food prices will ease further over the coming months‚ but the recent rise in global corn (maize) prices is a concern and could result in some upward pressure on SA’s food inflation by year-end‚” he said. - I-Net Bridge